Weekly Buzz: 🦾 Possibly AI’s most underrated opportunity

When people talk about AI investment opportunities, it’s usually all about the cloud. But there’s an AI investing theme that’s a lot closer to the ground, and poised to be just as big: end-device AI. Let’s disassemble it and find out just why it’s so exciting for investors.

What’s end-device AI?

Every day, our devices are spewing out vast amounts of data, and sending it to one of several places to be processed:

The cloud: Your data goes to powerful yet remote servers. For instance, when you ask Alexa a question, it’s sent off to remote servers to be processed, and an answer is sent back. This is the most common method for complex generative AI tasks, like running ChatGPT.

The device itself: This is end-device AI. Processing happens right on your gadget – be it a smartphone, a smartwatch, or a car. We've seen this with Apple’s iPhone, where voice processing occurs on the device without an internet connection.

And though end-device AI has gone under the radar, it’s poised to explode onto the scene. Newer devices can now process AI tasks with speed, locally, without relying on servers.

How big is the opportunity?

The total addressable market (our Jargon Buster below breaks this down) for end-device AI will be immense: over $14 billion in revenue for companies designing and manufacturing chips that can support it by 2025.

There’s a lot of demand, driven by two big factors. Firstly, the need for stronger hardware: as AI tasks become more advanced, existing chips will struggle to keep up. And secondly, the allure of better tech: the next generation of devices could compel people to upgrade, driving demand for end-device AI.

What does this mean for me, as an investor?

A variety of companies operate within this space, spread across the globe. Some focus on manufacturing, while others focus on R&D. And don’t just think of smartphones; laptops, smartwatches – even your car might one day be equipped with end-device AI.

If you’re thinking of seizing the opportunity, consider diversifying your investments across various companies – the tech sector is known for its volatility.

Perhaps the easiest way to do that is by staying invested in an ETF that captures the sector. For example, our Flexible Portfolios let you selectively invest in the Nasdaq 100, the index that tracks many of the US tech giants active in this field.

💡 Investors’ Corner

Stocks still beat bonds, even with interest rates like these

Government bonds now offer returns that are higher than they’ve been in ages. The long-term return for stocks is around 7% (based on the S&P 500’s history), so with current yields near 5%, bonds come pretty close, right? Well, not exactly.

If you invest $1,000 into bonds with a 5% yield, you’ll be paid $50 a year for ten years, and you’ll get your $1,000 back. After ten years, your $1,000 would turn into $1,500, for a 50% return.

Now, let’s say you’ve found a company that grows its profit of $50 at 5% a year, for the next ten years, and you buy one share at $1,000.

Here’s where compounding comes in. That $50 profit becomes $81 after ten years, and you could then sell your shares at 20 times that, for a total of $1,620 (20 times price-to-earnings is a rough average for the S&P 500). That’s a 62% return, a bit better than the bond’s 50%.

And 5% profit growth is not a massive ask – in fact, it’s a bit lower than what you should expect from stocks over time. Conversely, that 5% bond yield is an outlier: that’s the highest the yield has been in the past fifteen years.

Now, holding both stocks and bonds as part of a diversified portfolio can be a savvy move. Bonds are a great diversifying asset, lending stability to your portfolio. But if you’ve got a long-term time horizon, it’s difficult to beat stocks and the power of compounding.

This article was written in collaboration with Finimize.

🎓 Jargon Buster

Total addressable market

Imagine if just one company monopolized 100% of the customers in its target market. The amount of money that business could make if every single customer bought from them would be the total addressable market. It gives businesses a clear horizon of what’s possible, ensuring they don’t underestimate – or overestimate – their market opportunity.